Tuesday, May 31, 2011

RBI bats for big MFI autonomy

Till early this month,
there was an expectation among the various stakeholders that the Reserve Bank
of India (RBI) would strike a balance on the contradictory responses to various
recommendations put forth by its sub-committee — the Malegam panel — on a policy
for microfinance institutions (MFIs).

But the RBI's
announcement of a MFI policy on May 3, broadly on the basis of the Malegam
panel's views, throws up more questions than answers on the health of the
microfinance model.

An analysis of the key
points of the RBI's policy suggests that the apex bank may be batting more for
the big MFIs, leaving aside the smaller players and, more importantly, the
poor.

To begin with, the
fixing of the interest margin and interest rate cap at 12 per cent and 26 per
cent respectively would still leave more profit margins for the bigger MFIs in
a sector linked with financial inclusion and economic empowerment of the poor.

According to industry
estimates, the average cost of funds for MFIs varies between 12 per cent and 14
per cent, while operational expenses for the big MFIs are 6-7 per cent. So,
there is actually no strong case for the RBI to fix the interest rate cap at a
liberal 26 per cent, against the 24 per cent cap suggested by the Malegam
Panel.

Further, the RBI also
seems to have turned a blind eye to the fact that, over a period of time, the
incremental cost of operations would be less for major MFIs, which have a
presence in a large number of States. They can also take advantage of core
microfinance operations for other businesses such as sale of insurance, mobile
handsets, and so on.

For instance, SKS
Microfinance, which has announced plans to enter into lending against gold
ornaments to tide over the microfinance crisis in Andhra Pradesh, will
obviously use the same field force used for distributing micro loans, with
little incremental cost but with augmented income.

The business models
could still be viable for big MFIs, even if the interest is capped at around 20
per cent. The RBI could well have gone for a two-tiered model for deciding the
caps on interest margins and interest rates, taking into account the variations
in the cost of operations across major and smaller NBFC-MFIs.

If the RBI really wants
to protect the entire microfinance sector, it should also take into account the
situation of medium and small MFIs.

PROBLEMS IGNORED

It also appears that the
banking regulator is rather silent on some of the serious issues that came to
light in Andhra Pradesh over the last year.

The root-cause of the
MFI crisis in that State was the over-indebtedness of the poor, driven by
multiple lending. However, as against the stringent norms in the AP MFI Act on
multiple lending, it has been said in the policy that an indebtedness of up to Rs
50,000 could be allowed and a single member could take loans from two MFIs.

This is worrisome, as
the annual income of poor (going by the data of the AP Government) is below Rs
36,000 per annum.

If one could get loans
up to Rs 50,000, the maximum indebtedness, there can be multiple loans of
different combination for any MFI client. This means that the poor could be
constantly in a debt trap from which they cannot escape because their
indebtedness exceeds their annual income.

Under these
circumstances, it may come as no surprise if a similar situation to the MFI
crisis in Andhra Pradesh crops up in some other States, following the
saturation of their markets.

SELF-REGULATION

The need to ensure a
proper implementing agency has also been ignored in the policy. The question
still remains: While on-paper regulation is done by the RBI, who is responsible
for on-field regulation of MFI activities?

A gamut of operations —
from ensuring transparency in interest rates, maintenance of interest caps,
harassment-free collection and disbursal of loans, to name a few — have to be
monitored very carefully.

By ignoring a reasonable
contention of the Andhra Pradesh Government, that the lack of an enforcement
mechanism is a serious problem, the MFI policy went along with the Malegam
panel's suggestion that MFIs should be self- regulatory organisations.

Even for lending under
the priority sector category, banks may have no choice other than to go by the
interest margin/ interest rate submitted by the MFIs!

CLARITY

Given the seriousness of
the issue, the RBI should have also made a reference to the AP MFI Act in its
policy. The outward impression in the industry is that, along with other
recommendations, the RBI had also accepted the Malegam view that there would be
no need for the AP MFI Act if all of the panel's recommendations were accepted.
But the fact remains that the RBI is part of the Government. It cannot be
silent on an existing Act that totally contradicts the much-awaited policy on
micro-finance institutions.

As the Andhra Pradesh
Government is adamant about continuing with its Act, it remains to be seen how
things will unfold.

3 comments:

Close to 22500 Crores is at stake and RBI is doing nothing because of politics. It's a shame on account of RBI. This 22500 Crores are not RBI's but pertains to common investor who keep with hard earned money with banks, who further lend this money to MFI's....Shame Shame....

Agree... Government is for rich people ,not concern for poor sciety! While poor Dalits criss in pain..rich upper-caste mfi make too much money .. mfi loan should give free,else poor have alwyas suffer - CASTE SYSTEM HAVE ALWYS BIG ISSUE IN INDIA!!!!govt must help poor Dalit MORE AND MORE ,and, BAN THE MFI .. , else India alwys remains the poor country!!!!